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International Trade: Settlement & Financing

This is all about methods of international trade settlement and financing.

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International Trade: Settlement & Financing

  1. 1. International Trade Settlement & financing
  2. 2. Md. Abdul jalil ID: 814
  3. 3. 01 02 03 04 Exchange of Goods & Services Activities of Exporter & Importer International payments & Exchange Rates International Banking & Finance Internation al Trade Activities
  4. 4. 01 02 03 Beyond Normal CreditCredit facilities may be availed even when normal credit facilities are fully extended. Profitability EvaluationCustomer can evaluate the profitability of the customer by counting financial costs. Lower Margin The creditworthy customer can get lower margin than conventional overdraft.
  5. 5. Advance Payment01 02 03 04 Open Account Trading Documentary Collections Documentary Credit
  6. 6. . . Factors Determining Method of Payment Negotiations between exporter and importer The commercial practices in the countries involved
  7. 7. Open Account Trading No bank involvement in settlement of trade financing and in enforcing the payment. This method is based on complete trust between the importer and exporter. The documents of title is directly sent to the importer, and importer endorses the payments.
  8. 8. 01 02 03 04 Definition The collection service by a bank is a means whereby a creditor in one country obtains payment from a debtor in another country. URC The roles and responsibilities of banks in collections were established by ICC and are known as Uniform Rules for Collection (URC). Documentary Collection When the commercial and financial documents are present, it is known as documentary collection. Clean Collection A clean collection consists only of financial documents. Documentary Collections
  9. 9. Parties in Documentary Collections Debtor Debtor is usually the importer. Importer endorses the documents of pay the money. Remitting Bank This is where the document is sent from the bank. Collecting Bank A correspondent bank of the remitting bank who present the documents and collect the payment. Principal Exporter, who entrusts an outward collection to a commercial bank.
  10. 10. Collection Process (Outward Collections): Exporters 02 Exporter submits his financial and commercial documents to his banks in the home country. 04 Collecting bank arranges for the importer to inspect the documents. 06 When the bill is received, collecting bank sends the proceeds to the remitting bank. 01 Exporter negotiates a contract with importer and ships his/ her goods. 03 The remitting bank forwards documents to the collecting bank. 05 Collecting bank releases the documents against payment or acceptance of the bill or the issuing of a promissory note.
  11. 11. D/P versus D/A 02 The importer sign the bill as a promise to pay it at a set date in the future and documents are handled to him. 01 Documents against Payment means the bill is payable at sight by the importer. 02 The collecting bank hands over the documents only when importer has paid the bill. 01 Documents against Acceptance means the exporter allows credit terms to the importer, and bill is known as ‘usance’.
  12. 12. Advantages of Collections for the Exporter 01 02 03 Reduces Risk It reduces the risk for both exporter and importer for receiving payment and goods. Cheaper Collections are cheaper than documentary credit through the later is more safe. Obtaining Finances Exporter can raise finance by obtaining an advance against the security of the bill.
  13. 13. Possible Disadvantages of Collections for the Exporter 04030201 Rejection Overseas buyer might refuse to pay or accept a bill on presentation of the documents. Slow Remittance of docs and collection times can be relatively slow & exporter may have to wait. Financing Cost In case of usance bill, exporter may raise funds against the collection but it will increase cost . Protesting Cost Any expenses incurred by a collecting bank for protesting a bill are charged to the exporter.
  14. 14. Collection Process (Inward Collections): Importers 01 The collecting bank acts as agent to the remitting bank and explicitly follows the instructions of remitting bank. 02 Collecting bank advises the importer that collection has been received, seeks his acceptance or payment of the bill. 03 Collecting bank advises the fate of the bill of exchange by informing the remitting bank. 04 The collecting bank remit the proceeds to the remitting bank promptly less charges.
  15. 15. Advantages of Collections for the Importer 01 Term bill provides the buyer with a period of credit from the exporter. 02 Importer can inspect the documents before accepting a bill. 03 In clean collection, buyer can take possession of the goods before paying for them. 04 The collection is cheaper and simpler for the importer than documentary credits.
  16. 16. . . Disadvantages of Collections for the Importer Legal action might be taken against if importer dishonors an accepted bill of exchange. Refusal to accept goods could lead to a protest of non- acceptance.
  17. 17. Recourse Finance versus Non-recourse Finance 02 Avalization is the process whereby a bank guarantees a bill of exchange. 01 Bank grant loan against the collection in order to make available the exporter a part of all of the sale proceeds. 02 Generally, loan against collections are subject to full recourse to the exporter. 01 Non-recourse finance may happen where the bills are avalized by an overseas banks or the importer has strong credit rating.
  18. 18. Documentary Credit Irrevocable L/C Irrevocable L/C provides greater security to the exporter, hence almost all the L/C issued today are irrevocable L/C. Revocable L/C Importer can amend or cancel it without prior notice to the exporter, rate in today’s. Irrevocable L/C Once issued cannot be amended or cancelled without prior agreement of the exporter L/C It is a written undertaking by a bank on behalf on a importer to pay the seller an amount of money within a specified time provided the seller presents documents strictly in accordance with the terms of L/C. 01 0 1 04 03 02 02 0 3 04
  19. 19. Process of Documentary Credits (L/C) 02 The Importer’s bank is instructed to issue an L/C in favor of the exporter. 04 Exporter ships the goods and presents the documents to the advising, confirming or nominating firm. 06 Issuing bank makes the documents available to the importer and receive imbursement from the importer. 01 Importer negotiates a contract with exporter providing for payment by L/C. 03 Issuing bank sends the L/C to the exporter’s bank, known as advising banks, it may add its own confirmation. 05 The documents are forwarded to the issuing banks for receiving payment at sight or in future specified date.
  20. 20. Advantages of L/C for the Exporter Security and Confidence Bank guarantee 3 1 2 4 5 6No buyer risk Domestic payment arrangement is possible Confirmation is available UCPDC reduces unpleasant surprise
  21. 21. Advantages of L/C for the Importer Importer can obtain help and advice from the issuing bank. Importer can insist on shipment of goods within a reasonable period. Payments will only be made if documents are presented properly. Some costs may be passed to the exporter. Importer’s credibility increases in the eyes of exporter. Importer obtain trade credit and better price under L/C.
  22. 22. . . Disadvantages of L/C for the Importer Bank deals with documents, not goods, it doesn’t concern about goods’ condition. Importer is required a credit limit approved by bank, which restricts other credit facilities.
  23. 23. . . Confirmed L/C & Deferred Payment L/C Advising bank in the exporter’s country confirms an L/C. So, the L/C is guaranteed by two banks. L/C payment is made in future date, exporter need ‘t draw a bill of exchange.
  24. 24. General Types of L/Cs Transferable L/C Standby L/C Revolving L/C Back-to-Back Receipt & Undertaking L/C Red Clause L/C 3 1 2 4 5 6
  25. 25. Both involve an intermediary as seller. Intermediary substitutes his invoices in place of the original invoices. Terms and conditions vary between the first and second stages of transactions. Similarities Between Back to Back L/C and Transferable L/C
  26. 26. BACKTOBACK L/C 03 01 04 02 TRANSFERABLE L/C 07 05 08 06 Back to Back involves two L/Cs. Differences between Back to Back L/C and Transferable L/C Transferable credit involves one L/C. Back to Back arrangement may work with any L/C. Transferable L/C is designated as ‘Transferable’. L/C is issued under the full responsibility of bank. L/C is transferred without the responsibility of bank. Intermediary needs credit to be approved by bank. Intermediary needn’t credit to be approved by bank.
  27. 27. Bank discounts the bill of exchange (L/C) less interest charges. Discounting L/C is obtained on a non recourse basis. Exporter can offer credit terms to importer though obtain immediate proceeds. Post Shipment Finance for Exporters
  28. 28. Back to Back Letter of Credit. Red Clause Letter of Credit. Receipt and Undertaking Letter of Credit Pre Shipment Finance for Exporters
  29. 29. Post-shipment Finance for Importers 01 There are Two types: documentary import loans and clean import loans. 02 Import loans used as stand-alone funding vehicle and essentially not much different from other loans. 03 Finance is made available against the security as letter of pledge or trust receipts in documentary import loans. 04 Clean import loans are appropriate when loans need to be structured and transactional control is not required.
  30. 30. Security Documents used with Documentary Import Loans A General Letter of Pledge Bills of Lading A Warehouse Warrant Shipping Documents Airway Bill Trust Receipts 3 1 2 4 5 6
  31. 31. Advantages of Documentary Import Loans for the Banks 04030201 More Loans Banks can lend more though the customer’s balance sheet don’t support the levels requested. Structured Banks know the source and timing of repayment and exactly know what they are lending against. Transactional Control Transactional control is obtained by handling shipping documents. Early Warning Non-repayment on due date provides an early warning of possible problems ahead.
  32. 32. . . Disadvantages of Documentary Import for Banks Additional cost of administration- security taking, structuring is time consuming, additional monitoring. The value of goods may fall significantly in case of forced sale.
  33. 33. . . Advantages of Documentary Import loans for Importer The increased assurance permits the importer to obtain increased credit facilities. The importer may obtain reduction in pricing compared to overdraft.
  34. 34. . . Disadvantages of Documentary Import loans for Importer Complex administration and less flexibility compared to conventional overdraft. Banks’ involvement in movements of goods are disliked by importer.
  35. 35. THANK YOU ! Hope you enjoyed! :)